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How to predict option trends
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F&O analysis reports often talk about more call writing happening or more puts being added on long side at a strike price etc. to predict some trend. As the total number of long positions will be equal to total number of short positions at any given time, do these kind of statements make any sense?
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Raju P.K
It is a common practice to predict the trend of an underlying by using certain metrics of derivative contracts and a very important number that many traders track is Open Interest (OI). When OI goes up by one contract that means one new buyer and one new seller have entered, be it a futures contract or an options contract. In that sense, the number of buyers and sellers are equal here. However, it is important to understand that the number of OI per se cannot lend us any clue on the direction. It should be seen in conjunction with the price movement.
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